Owning a home may be a cherished dream for most of us, but only a select few can buy or construct their dream home from their own pocket. So getting a home loan remains the only viable option. However, a home loan is a long-term commitment, stretching up to 20-30 years in many instances. Then there is the down payment one needs to pay upfront, which can go up to 20-30 percent of the property’s value. All these factors make it critical to plan well in advance and consolidate your finances, before applying for a home loan. Here are some financial planning tips for setting yourself comfortably on the path to homeownership.
Fetch your credit report
A good credit score means higher creditworthiness. Generally, banks and housing finance companies (HFCs) consider credit scores of 750 and above as ‘good’. Borrowers with such scores have a higher probability of getting a loan approved, and of getting a good deal on their loans.
Keeping this in mind, you must fetch free-of-cost credit reports from credit bureaus at regular intervals and report errors or misinformation, if any, to the bureaus for rectification. Regular checking will also give you sufficient time to take corrective steps for improving your credit score.
Alternatively, you can visit online financial marketplaces to get free credit reports and monthly updates. Such marketplaces also provide pre-approved home loan offers based on your credit score and other personal details.
Check your EMI affordability
Lenders usually prefer EMIs to remain within 40 percent of your net monthly income. This will include existing EMIs and the one on the new home loan.
To arrive at what kind of EMI you can afford, you must estimate future cash flows and their contributions to your various financial goals. The aim should be to keep your home loan EMI within 30 percent of your net monthly income. This should provide you with sufficient room to deal with increased EMIs due to interest rate hikes and to borrow more when faced with unforeseen emergencies.
Do not sacrifice your contributions to other essential financial goals like retirement planning, children’s education or building a wedding corpus. Neglecting them will force you to take costlier loans later and harm your financial health.
Build a corpus for your home loan down payment
Currently, RBI regulations allow lenders to finance up to 90 percent of the property’s value, for home loans of up to Rs 30 lakh. For home loan amounts of Rs 30-75 lakh, and above Rs 75 lakh, lenders can lend up to 80 percent and 75 percent of the property’s cost, respectively.
You should try to create a big corpus for a down payment on your home loan, as doing so will reduce your overall interest cost. Moreover, lenders are not allowed to include fees like stamp duty and registration charges in the loan amount for properties costing above Rs 10 lakh. As these charges can cost up to 10 percent of your property’s cost, you should include them in the corpus you are building to cover the down payment.
Once you have an idea of the amount required to buy or construct your house, inflate it by at least 10 percent per annum to account for housing inflation. If you fall short of your target corpus, then start investing based on the time left for you to make the purchase. Invest in short-term debt funds for up to 3 years. For time horizons of 3-5 years and more, invest in hybrid funds and equity funds, respectively.
Maintain a steady job profile
As home loans require a long-term commitment, lenders consider career stability and the employer’s profile while evaluating home loan applications. For example, banks usually prefer lending to those with government jobs or those employed with big corporates and multi-nationals.
Self-employed or those with hazardous job profiles are the least-preferred. Similarly, frequent job hoppers are also considered less creditworthy as changing jobs frequently considered a sign of an unstable career. Although housing finance companies are less stringent, they charge higher interest rates and fees than banks do. So avoid changing jobs frequently if you are planning to avail of a home loan in the near future.
Maintain an adequate emergency fund
This fund is meant to deal with unforeseen expenses or to meet your mandatory expenses if and when you are unemployed. Ideally, this fund should be equivalent to at least six times your mandatory expenses, including daily living expenses, existing EMIs, and insurance premiums, among other things.
An inadequate emergency fund may force you to redeem your long-term equity investments, including your home loan down payment corpus, or avail costly loans. Before you start applying for a home loan, increase the fund’s size to six times your expected home loan EMI. Park your emergency fund in short-term debt funds or arbitrage funds (if you fall in higher tax slabs) for earning better returns at higher liquidity than fixed deposits.
Compare all your home loan options
Once you are ready to shop for your home loan, visit online lending marketplaces to compare various home loan options available on your credit score, monthly income, and other eligibility criteria. This will also preserve your credit score as credit bureaus do not reduce credit score on making loan applications through lending marketplaces. On the contrary, making direct loan applications with the lenders will reduce your credit score and the chances of you getting a loan.